November 30, 2012

Working from my iPad while the desktop is busy doing backups in preparation of downloading and installing the first draft of my Drake Software. Now, before anyone hollers at me, I do have nightly offsite backup and regular catch ups to a UBS drive that goes with me. But before I change my software, I want to make sure all my settings are properly backed up.

I hadn't planned on doing this until next week after I attend the Drake update on Monday. But, I understand that there are some changes to the document manager and I want to check those out so if I have questions, I can ask then at that time.

I've also begun to get other supplies ordered. Calendars for my pre-season mailing and reference materials are on the way. (a lot was ordered in the spring when there were deep discounts.)

PTIN has been renewed and CPEs are almost finished. But there is still practice with the new software and getting the computers networked. 2 of 3 computers were upgraded the summer and I never redid the network. I can't put it off any longer.

I also need to check with my cloud services to see if I need to increase storage size for them. I'd really hate to have to deal with not enough space in Febuary.

And there is cleaning, shredding the files I can and a lot more. So, while most people are decorating and preparing for the holiday, I'm preparing for January 22, 2013. That's the first day we can e-file. That is if Congress gets to work on AMT and the extenders.

November 29, 2012

Earlier this year, the IRS announced interim rules for
issuing ITINs (Individual Taxpayer Identification Numbers). This is the number
used on tax return for people who can’t qualify for a Social Security numbers.
For example, the spouse and children of a taxpayers who has a work only SSN.
The temporary rules made it harder to get an ITIN by requiring that the original
documentation or copies certified by the issuing agency be submitted with the
application. Until then, the applicant could use notarized copies of the original
documents.

This rule has been made permanent with IR-2012-98. However; understanding
that being without the original documents while an application is being
processed can be an issue, the IRS will be allowing Certified Acceptance Agents
(CAA) to certify they have authenticated the documents so that papers such as
passports don’t have to be mailed to the IRS. One exception to these rules
concerns the documentation for dependent children. These documents will still
have to accompany the application. CAAs will now have to be someone who is also
covered by Circular 230 (EA, CPA, RTRP…) and they will be required to take
formal forensic training to help identify legitimate documents. The IRS will
also step up their oversight and compliance activities with CAAs.

Beside submitting ITIN applications directly to the IRS or
using a CAA, the IRS is planning on using some Taxpayer Assistance Centers, the
US Tax Attaches in several countries, and VITA and Low-Income Taxpayer Clinics
which have CAAs to validate supporting documentation. The policy put into place
last month for foreign students to be certified through the Student Exchange
Visitors Program will continue.

The new program will go into effect January 1, 2013 to meet
the high demand of the tax filing season. Documentation changes will not apply
to spouses and dependents of US military personal and nonresident aliens who
need an ITIN to claim tax treaty benefits.

The biggest change to the program will be that ITINs will
now expire after 5 years. The Taxpayer will be able to renew their ITIN before
it expires. The IRS is also looking at a way to keep the information on the
ITIN holder updated or to deactivate the number as necessary. The IRS sees this
program as an ongoing process and they invite taxpayers to submit comments and
suggestion by e-mail to ITINprogramoffice@irs.gov.

November 28, 2012

I just took a call from someone asking if once he gets his
final check for the year (and accompanying check stub) if he can file his tax
return. No he can’t and neither can you.

The IRS requires that a copy of the W-2 must be attached
with a paper filed return and a copy of the W-2 must be kept with the signature
sheet of any electronically filed return. You have to wait until you receive
all your W-2s and other informational documents to file your returns.

Once I tell a caller that, the next question is generally
about an ad they’ve heard on television about a using a paystub to get a
holiday loan. While I haven’t heard one yet this year, I’m sure there are or
will be some companies offering that kind of program. But you want to
understand they are not filing a return. The IRS won’t be accepting
electronically filed returns until at least January 22.

Tax Preparation companies which offer these holiday loans
use your paystub to estimate what your Federal tax refund will be and base a
loan on that amount. The money comes from the bank or finance company with
which they have an arrangement. You then pay the loan back by a specific date.
You will still have to file a tax return once you have all your return
documents.

If this is something you are interested in doing, please be
very careful. Many of the companies doing holiday tax loans are reputable
(while they might gouge you with high fees.) But they are other companies that
will rip you off. Before you try a holiday tax loan, please look at Instant Tax
Service. I wrote a couple of posts about them last year and there are links at
the bottom of this post. The Department of Justice filed permanent injunctions
against the company, owner and several franchisees. Besides their outrageously
high fees, ITS also filed returns without the client’s permission based on
fraudulent documents they (ITS) created. Many times, they left the client
having to payback money they never received or fighting to straighten out the
mess that ITS created.

I understand that most of us could use extra money this time
of the year and it’s tempting to try to get an advance on your tax refund but
using a holiday loan from a tax preparation company can cost you high fees. And
if the firm isn’t reputable it can force you to deal with the IRS to straighten
out the mess they create. Talk your local bank or credit union and see what
they can do for you. It’ll be cheaper than any tax prep office.

November 26, 2012

As we head into Christmas, a few reminders for charitable
contributions. It doesn’t matter if you are giving as part of a holiday
contribution program or for tax reasons; you need to do it correctly to prevent
future problems.

Make sure that the organization to which you are
contributing is an authorized organization. You can check on the IRS web site.
If the organization you want to contribute to isn’t listed, check and see if
they are working under another tax deductible organization’s umbrella. Not
being listed doesn’t mean that they aren’t a good organization doing good work.
You just can’t deduct your contributions to them on your tax return.

All the small gifts you make, like cash into the Salvation
Army bucket, won’t be deductible unless you write them a check or get a
receipt. You may have the best intentions but there is no deduction without
some documentation.

If you give more than $250, you have to have a contemporary receipt.
Your check is not enough to prove your deduction. Also, make sure that your
receipt has the correct date and lists any good and services you received as
part of the contribution. You are only allowed to deduct the amount of the
contribution less the value of the goods and services received. Even if the tax
deductible organization doesn’t give you anything in return for your
contribution, their receipt must say that in order to be acceptable to the IRS.

Get the receipt at the time you make the contribution. The
IRS won’t accept one written later.

If you are giving goods, follow the special rules for those.
Make of list of everything you are contribution as you put your donation
together. Once you know what you are dropping off, you can calculate the value
using one of the contribution value lists. And do get a receipt from the
receiving organization to document that you did give the goods. Just staple
this to your inventory and pricing and put with you tax records. Salvation Army List.Goodwill (downloads).

There are some non-cash donations, like cars or art, which
have special rules. Make sure you follow them. Get independent appraisals for
large ticket contributions and anything appreciable.

Helping a charity is a good feeling but if you also want the
good feeling of saving on your taxes, you need to follow the IRS’s rules on
documentation.

Nothing directly from the IRS yet, but according to the
Nov.21st Kiplinger Tax Letter the IRS will not be giving refund
dates for 2012 returns.

The IRS has always published Pub. 2043 which gave tax pros
target dates for refunds. Based on when the return was electronically accepted
by the IRS, we would get a target releases date for both direct deposited and
mailed refunds. This was when the IRS would release the money to the bank or
when they would mail the check. But because of the problems with refunds last
year, the IRS looks to be defaulting to a “within about 21 days” time frame.

The 2012 filing season (2011 returns) was a mess. First,
fraud filters worked too well and delayed many of the first returns filed. Then
many early February returns were caught in a bottleneck caused by the new
Modernized e-File system. The MeF worked well but other systems couldn’t handle
the faster processing and bogged down. Once all these issues were resolved,
some taxpayers still had to wait longer than projected for their refunds.

So for 2013 filing season (2012 returns), it looks like all
we will get is a general 21days time frame until the return is being processed
and appears in the “Where’s My Refund” database.

November 21, 2012

Kansas has made a change to how they treat a net operating
loss (NOL).

According to IRS’s Pub. 536, “If your deductions for the
year are more than your income for the year, you may have a net operating loss
(NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting
it from your income in another year or years.” For individuals, if your line 41
is a negative number, you might have a NOL. Basically, you need to have a
business loss that is large enough to offset any other income. On the Federal
level, the loss could be carried back or forward to offset income in other
years. (A very simplified explanation.) Kansas has always required a separate
calculation and will only allow the NOL to be carried forward for up to 10
years. The Federal NOL is added to the AGI from the taxpayer’s Federal return
and the Kansas NOL is subtracted to create the Kansas Adjusted Gross Income.

Beginning with 2013, Kansas will no longer have NOLs for
individuals. In a way it makes sense since Kansas will no longer be taxing
business income. Qualified Federal business income will be subtracted from the Federal
Adjusted Gross Income to create the Kansas Adjusted Gross Income. A business
loss is added back to KAGI.("Business" could be from Sch C, Sch F or Sch E.)

What about NOLs from prior years? They’re gone too. A
taxpayer carrying forward a NOL from 2011 will lose any deduction that is not
used in 2012. The Federal NOL will still have to be added back to figure Kansas
income.

Part of me is happy with the decision because the separate
calculation and tracking of the Kansas NOL is a pain but that means that lots
of taxpayers lost a major deduction and will be getting a surprise in 2013.

November 20, 2012

For the 2012 filing season, the IRS has added another page
to the Earned Income Credit Checklist (Form 8867). This is the form tax pros
complete to document their due diligence when a taxpayer’s return includes the
Earned Income Credit. The form, in one form or another, has been around for
over 10 year but last year the IRS started requiring the form be included with
any return requesting EITC.

The Earned Income Tax Credit (EITC) is a refundable credit
targeted at low income families. It was enacted in 1975 to offset the social
security taxes taxpayers with children paid through withholding. At that time,
the credit was 10% of wages up to $4000. But in 1986, the credit was seriously
expanded. There have been several more expansions of the credit. Today, EITC is
available to taxpayers with and without children and on 2011 returns the
maximum credit is $5700. In 2009, the IRS processed 27.4 million tax returns
and paid $60.4 billion in claims. 23 states have their own variations of the
credit.

EITC is a good program and helps a lot of families.
Unfortunately, it is a fraud magnet. According to TIGTA’s May 2011 report to
the House Ways and Means committee (download), The IRS estimates between 23% and 28% of the
EITC payments are improper. In 2009, this resulted in $11 to $13 billion in
improper payments. As part of a program to reduce the bad EITC claims, the IRS
has begun to put more pressure on the tax professional community. If a paid
preparer doesn’t do adequate due diligence to make sure a client does qualify
for EITC, they could face a $500 fine for each client they qualify but
shouldn’t have.

The current form 8867 not only acts like a check list for
each EITC qualification but now asks about what documentation was provided and
what follow up questions the tax preparer asked. For example, one new question
ask if the tiebreaker rules were explained when the qualifying child could be
claimed by more than one taxpayer. The new page wants to know what
documentation, if any, the preparer saw to verify EITC issues like residency,
business income and child disability.

My concern is a possible change in IRS interpretation.
Preparers have always been told that we aren’t responsible to audit the records
taxpayers bring in to us. We need to ask questions and make sure we understand
how the documentation was put together. If something seems wonky, ask more
questions and document what we find. The new EITC questions could make it
easier for the IRS to pull out returns to investigate further not because there
is concern that the EITC on that return is fraudulent but because a box wasn’t
checked. A box that is not required to be checked.

Last year, I created an interview form for EITC that not
only makes sure I ask about everything but gives me a place to write questions,
responses and notes about the EITC interview. And since most of my EITC clients
have been with me for years, I’m not worried about the credit being questioned
unless the auditor doesn’t understand the purpose of Form 8867 is to aid the
preparer in doing their EITC due diligence. The form is not a pre-audit of the
taxpayer. If a preparer is preparing fraudulent EITC claims, they will have no
problem with lying on Form 8867. Investigate good EITC claims because of
nothing more than what is on the Form 8867, and more good preparers will stop
doing EITC because of the hassle involved. How many of their clients will end
up with a bad preparer?

November 19, 2012

It’s been a while since I posted. It wasn’t deliberate but
life got in the way. Since my last posting, the show I directed has opened and
closed, I have been out of the office at a tax workshop and had the current
crud that’s going around. My plans of posting while on the road just didn’t
work.

I’ve started working on getting ready for tax season. I’ve
renewed my PTIN so I’m legal and the next task is a deep cleaning at the
office.

But mostly, I’ll be posting much more because Congress has
decided to work and there are a bunch of changes to forms to talk about.

One addition to my last post, taxpayers affected by hurricane
Sandy can qualify to take hardship loans from the 401K plans. Please check out
IT-2012-93 for all the details.

November 08, 2012

The IRS has released information on a variety of programs to
help the victims of Hurricane Sandy.

If you have created a charity to benefit hurricane victims,
you will still have to complete Form 1023 to apply for tax-exempt status but the
IRS will expedite processing. All you have to do is write “Disaster Relief,
Hurricane Sandy on the top of the form. If you have already mailed your
application, you can fax a request with the same heading and the organization’s
name, EIN, contact name and phone number to 513-263-4554. If you are still
thinking about starting a charity organization for Sandy, check you Pub. 3833 –
Disaster Relief: Providing Assistance through Charitable Organization.

The IRS has also temporarily suspended the rules for low income
housing. Owners can rent to Sandy victims who don’t meet the income guideline
or just need temporary housing. There is no mention, at this time, how long the
suspension will be in effect.

To encourage employers and employees to donate leave time to
qualified charities for disaster relief, the IRS will allow these types of
contributions to be deductible by employers but not included in the employee’s
W-2. Say a taxpayer donates one day of vacation from their paid leave bank, the
employer gives the cash equivalent for that day to an eligible charity for the
employee. The employer can still deduct the money as wages but not include it
as compensation on the employee’s W-2. Of course, the employee can’t include
the cost of that day’s wages as a charitable contribution since it wasn’t
treated as income.

The Work Opportunity Tax Credit was established in the VOW
to Hire Heroes Act of 2011 as an incentive for employers to hire qualified
military veterans. It’s set to expire on Dec 31, 2012 unless Congress does
something to change that in the next few weeks.

But employers can still take advantage of the program as
long as the veteran starts working before the end of the year. They then have
28 days to submit Form 8850, Pre-Screening Notice and Certification Request
with their state workforce agency.

The maximum tax credit is $9,600 for businesses that are for
profit and $6,240 for non-profit businesses. The amount of the credit depends
on how long the vet was unemployed before being hired, the number of hours they
are working, their 1st year wages and if the veteran is disabled.
All the details can be found on the US Dept. of Labor website or check www.irs.gov and search for “WOTC”

Disclaimer

Disclaimer

A reader should seek advice from an independent tax adviser with respect to the information on this blog based on the reader’s particular circumstances. This advice is intended to be general information and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed here.